Social Impact Bonds: A Public-Private Partnership That Benefits All?

November 25, 2013

by Haley Sinklair

A reduction in recidivism rates among adolescent offenders has commonly been the aim of social programs across the country, but a new take on the process may save money–and even return a profit–while helping out the public good. A recent investment by Goldman Sachs, in partnership with the City of New York, Bloomberg Philanthropies, and MDRC, hopes to use the new tool, Social Impact Bonds, to fight this problem.

In 2012 the New York City Department of Corrections asked for private corporate investors, so Goldman Sachs decided to invest $9.6 million in the Adolescent Behavioral Learning Experience (ABLE) program, which seeks to reduce the number of youth offenders going back to prison.

The ABLE program is a type of Social Impact Bond, which is a new private-public investment in social reform. Through the use of private financing of a non-profit program that provides services the government would otherwise fund, money can be saved based on the level of success achieved.

With the national debt surpassing $17 trillion and social programs reaching their limit, private involvement in public preventive programs may be the wave of the future. It’s too early to tell just yet, but in just a few short years several projects will have their results thoroughly tested to see how they stack up against their contracts’ outlined objectives.

How does it work?

Before the government decides to enter into this public-private partnership, they must decide there is problem that needs fixing. Once a problem is identified, the government can reach out to other partners.

The process usually includes four actors: a local government, an intermediary, a non-profit organization, and an investor. The whole approach takes a handful of steps, but the details of the contract between parties are essential to proper success. A poorly written contract can result in disagreement over the interpretation of results, and the method of measuring results, among other problems.

The government is responsible for contracting with an intermediary. The intermediary is then responsible for raising capital from private investors to put towards hired service providers specializing in social services, such as reducing youth recidivism. The intermediary will only receive payment from the government if the specified performance targets (outlined in the contract) are met.

Social Impact Bonds, however, are not “bonds,” in the true sense of the word. If the project fails the objectives outlined in the contract, the investor stands to lose all capital originally invested into the program. Regular bonds usually guarantee a return on investment.

If the program is successful, and the government saves money, a portion of the financial savings will be paid back to investors (by the government) for sharing the risk and providing upfront capital. The remaining portion of the savings remains in the hands of government to use as seen fit–usually to reinvest in more programs that help serve the public good.

If a program fails and recidivism is not lowered, the government does not release payment and the investors stand to lose up to 100 percent of their investment. Sometimes, there are safeguards in place to help mitigate risk. Such is the case in the New York City social impact bond, where Goldman Sachs’ capital may be guaranteed by the philanthropic loan of $7.2 million, provided by Bloomberg Philanthropies.

Protections are also put in place for the population served. Such protections are defined in the contract and include things like winding down services to create a smooth transition back to publicly funded social services. No matter how disastrous a program turns out to be, the population being served should not be hurt.

Can SIBs really work?

Due to their recent appearance on the market, Social Impact Bonds have not necessarily proven how successful they can be, but the potential for public savings as well as public good through the partnership of private companies and government is worth its pursuance.

One issue of Social Impact Bonds is the timeframe. Contracts tend to last between three and seven years. With the very first SIB having launched in the United Kingdom in September 2010, creating a six-year contract, significant data hasn’t been gathered to accurately estimate the output of their recidivism program. However, if in 2016 the program is deemed successful (with recidivism rates falling by 7.5 percent or more), investors can earn a return of 7 to 13 percent on their investment.

But in a recent report by The Rockefeller Foundation on the U.K. initiative to reduce recidivism rates among recently released inmates, program administrators have made progress in “finding housing, accessing health care, and increasing the income of prisoners leaving Peterborough prison.” In the same report, participants are also claiming “better control of their lives,” and lower recidivism rates, which have also been confirmed by police.

Though it is unclear whether or not Social Impact Bonds are the way of the future, learning from its mistakes may be beneficial as well. According to the Harvard Kennedy School, the use of SIBs allows for more quality control by private investors, which can lead to better performance for programs.

Because of the risk involved for private investors, this allows for more innovation of social services to help reduce the risk of investment and benefit the public in the best way possible. The evaluations involved in assessing whether or not a program succeeds will also provide insight into which programs do and don’t work, to prevent further failures down the road.

Social Impact Bonds could help boost preventive programs for the public while giving investors a return on their money and providing taxpayers significant savings. If they prove to be a success, this new public-private venture could be exactly what is needed.